Investment Highlights

• We downgrade our recommendation on Petronas Chemicals Group (PChem) to HOLD from BUY as the share price’s 6- month appreciation has narrowed the potential upside to our unchanged fair value of RM8.35/share based on an FY18F EV/EBITDA of 9x, 1 standard deviation (SD) above its 3-year average of 8x.

• Our FY17F-FY19F earnings are maintained as we expect that the group’s 4QFY17 results, scheduled to be released on 20 February, to come in within expectations on stable plant utilisation rate with the recent completion of a methanol facility turnaround.

• Also, the reported gas leak and shut-in at the Sabah-Sarawak Gas Pipeline on 10 January this year has not affected PChem’s operations at PC Fertiliser Sabah in Sipitang.

• With crude oil prices lingering just below the US$70/barrel range, we expect limited upside as the unusually cold winter season in the northern hemisphere recedes amid the unwinding of speculative futures positions. Our house view for crude oil price remains at US$55-US$60/barrel for 2018.

• The group’s product prices have a strong correlation to Brent crude oil prices which have risen 20% since 30 September 2017 to over US$68/barrel. In 4Q2017, benzene has risen 29%, naphtha and polyethylene 10%. However, methanol has fallen by 5% due to oversupply with the completion of regional facilities’ turnarounds.

• As such, given the 1-year correlation coefficient of 0.7 between PChem share price and Brent crude oil prices, we do not expect further significant share price appreciation.

• PChem’s EV/EBITDA is currently trading at a 1-year forward EV/EBITDA of 9x, which translates to a 16% premium to Thailand’s PTT Global Chemicals (PTTGC) compared to the 3- year average premium of 31%. This stems from PTTGC also trading at an elevated EV/EBITDA of 8x, which is 2.5SD above its 3-year average.

• For this year, while a major cracker turnaround activity is scheduled in 3Q2018, management expects to achieve an overall average plant utilization rate of over 90%, similar to 91% in 9MFY17.

• The group's 40%-owned US$500mil Aroma plant in Gebeng, Kuantan has commenced operations progressively from September 2017 and it is not expected to significantly accrue to group earnings as the plant’s capacity of 30,000 MT annually represents only 1% of the PChem’s 2.7mil MT. Likewise, the highly reactive polyisobutene plant which is expected to commence soon with an annual capacity of 50,000 MT will also have a slight earnings impact.

• The stock currently trades at a fair FY18F EV/EBITDA of 9x, 1SD above its 3-year average of 8x, while dividend yields are fair at 4%.

Source: AmInvest Research - 30 Jan 2018